Investor Lawyers Blog

Regulator Headlines: SEC Commissioner Stein Wants Updated Capital Rules for Brokerage Firms, FINRA’s BrokerCheck Link Proposal Faces Opposition, & CFTC Appoints New Enforcement Head

Published on: June 12, 2014 | by Shepherd Smith Edwards & Kantas, LLP

SEC Commissioner Wants Big Broker-Dealers To Hold More Capital

Securities and Exchange Commissioner Kara M. Stein wants the regulator to modify its capital rules for large brokerage firms so that they would be required to hold more capital in the event of a funding crisis. Stein wants the regulation to better factor the risk involved in short-term funding markets on which brokers depend. She also would like the latter to protect against failures that could upset the financial system.

Right now, the SEC is looking at new funding rules for brokers and placing limits on leverage, not unlike what regulators require for banks. However, Stein believes that the agency’s current approach, which is to protect customers but without considering how to keep companies in operation, needs work. The SEC Commissioner believes that the agency’s capital rules for big brokers should be based on preventing the failure of “systemically significant” firms. Stein also wants the SEC to finally implement the rules that were called for by the 2010 Dodd Frank Ac, including those that would limit the risks involving swap contracts.

Ex-ArthroCare CEO and CFO Convicted in Texas Securities Fraud Case

Published on: June 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

A Texas jury has convicted to two ex-ArthroCare executives with operating a $400 million scam to bilk investors. Michael Baker, the former CEO, was found guilty of wire fraud, securities fraud, conspiracy to commit both, and making false statements. Michael Gluck, the ex-CFO, was found guilty of securities fraud, wire fraud, and conspiracy to commit both also. ArthroCare manufactures medical devices.

According to prosecutors, from 2005 until 2009 the two men and others inflated sales and revenue by tens of millions of dollars through transactions with several ArthroCare distributors. Some of the transactions occurred because the medical device maker had to satisfy sales forecasts and not to fulfill distributors’ product needs. As a result, ArthroCare sent million of dollars worth of devices to these distributors, reporting the deliveries as sales in yearly and quarterly filings. This let ArthroCare meet and sometimes even exceed predicted sales.

Meantime, the distributors consented to the extra inventory in return for cash commission, extended terms of payment, and a refund option. Gluk and Baker even compelled the company to acquire DiscoCare, a distributor, to hide the nature of these sales.

SEC Charges Chicago Investment Advisory Founder With Real Estate Investment Fraud

Published on: June 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Attorney Robert C. Acri with Illinois securities fraud related to a real estate venture. Acri is the founder of Kenilworth Asset Management, LLC, a Chicago-based investment advisory firm. He has agreed to settle by disgorging the funds that were misappropriated from investors, as well as commissions, interest, and a penalty. Monetary sanctions total about $115,000.

The SEC brought the real estate investment fraud charges after detecting possible misconduct when it examined the firm. The regulator’s Enforcement Division was alerted and a probe followed.

According to the findings of the investigation, Acri misled investors over promissory notes that were issued to supposedly redevelop an Indiana shopping center, misappropriated $41,250 for other purposes, and failed to tell investors that the firm received a 5% on every note sale. This amount would total $13,750. He also purportedly did not let investors know a number of material facts, including that the reason there even was an investment offer is that he was trying to rescue funds that other clients had invested earlier in the same real estate developer.

SEC Files Order Against New Mexico Investment Adviser Over Allegedly Secret Commissions

Published on: June 10, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has submitted an order against Dennis J. Malouf accusing him of investment adviser fraud. The regulator says that he allegedly took trading commissions that he wasn’t entitled to for himself. He was in charge of UASNM’s bond trading operation between 2008 and May 2011. Malouf, who was the CEO of UASNM Inc. is now with M Wealth Management.

According to the Commission, he set up a secret verbal deal with someone at a broker-dealer branch to send him the commissions generated by the broker for bond trades that this person did with Malouf’s firm. The regulator claims that rather than look for the best way to make the bond trades happen, UASNM worked only with the broker-dealer. Over the approximately three-year period, the investment advisory firm made over 200 bond trades through the unnamed branch. This was about $30 million to $40 million in trades every year, for which Malouf obtained about $1.1M in commissions.

In 2011, UASNM fired Malouf, who was a majority owner,because of misconduct allegations. He then sued for wrongful termination and that is when the firm’s attorneys discovered the purported commission deal.

FINRA Headlines: SRO Fines Goldman Sachs, Merrill Lynch, and Barclays Capital $1M Each & Makes Dark Pool Data Available

Published on: June 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Fines Merrill Lynch, Goldman, and Barclays Capital $1M Each Over Blue Sheet Data

The Financial Industry Regulatory Authority has issued a censure that fines Goldman Sachs & Co. (GS), Merrill Lynch, Pierce Fenner & Smith Inc., and Barclays Capital Inc. $1 million each. The firms are accused of not submitting accurate and complete data about trades conducted by them and their customers to the SRO and other regulators. This information is known as “blue sheet” data. Firms are legally required to give regulators this information upon request.

Blue sheets give regulators specific information about trades, including the name of a security, the price, the day it was traded, who was involved, and the size of transaction. This information is helpful to identify anomalies in trading and look into possible market manipulations.

Bank of America Could Settle Mortgage Probes for $12B

Published on: June 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, Bank of America Corp. (BAC) is in negotiations to settle the mortgage probes by the U.S. Department of Justice and several states for at least $12 billion. The bank has been under investigation over the sale, underwriting and securitization of residential mortgage bonds from prior to the 2008 financial crisis.

At least $5 billion would go to consumer relief as help for homeowners to lower their principals, as well as pay blight removal in certain neighborhoods. Already, BofA has agreed to pay $6 billion to settle with the Federal House Finance Agency related to residential mortgage backed securities that were purchased by Freddie Mac (FMCC) and Fannie Mae (FNMA) between 2005 and 2007. That case also involved allegations made against the bank’s Merrill Lynch and Countrywide Financial Group.

However, government negotiators are pressing BofA to pay billions of dollars more than $12B in this case. If a deal isn’t struck, the US Department of Justice may opt to file a civil lawsuit against the bank.

SEC To Tackle High-Speed Trading, Dark Pools With New Initiatives

Published on: June 6, 2014 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Securities and Exchange Commission Chairman Mary Jo White said that the regulator is working on new rules that would target dark pools, high-speed traders, order-routing practices, and trading venues that don’t offer much transparency. Her proposed regulations mark the first time she has spoken about her plans to overhaul equity market structure rules since becoming head of the SEC last year.

Included in White’s proposals are an “anti-disruptive trading” regulation to curb high-frequency traders from making aggressive short-term trades when the market is vulnerable, as well as a strategy to make proprietary trading shops register with the regulators and share their books for inspection. The SEC chairman also said that her team is working on enhancing the way trading firms handle the risks involved with computer algorithms.

To improve oversight over high-speed traders, White wants to shut a loophole that lets trading firms get out of registering with the Financial Industry Regulatory Authority if they trade off traditional exchanges. Also, while noting that it wasn’t the job of the SEC to forbid algorithmic trading, White said that the Commission is trying to determine if there is anything about a computer-driven trading environment that works against the best interests of investors.

SEC Sues Wedbush Securities and Dark Pool Operator Liquidnet Over Regulatory Violations

Published on: June 6, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed a civil case against Wedbush Securities Inc. and two of its officials. The regulator claims they violated a rule that mandates that firms have proper risk controls in place before giving customers market access.

According to the SEC order, between 2011 through 2013 Wedbush allowed most of its market access customers to send orders straight to U.S. Trading venues and did not keep up direct and sole control over trading platform settings. Customers used these platforms to transmit orders to the markets.

The Commission contends that Wedbush should have had the mandated pre-trade controls in place. It claims that the firm failed to perform a yearly review of its risk management controls related to market access and did not limit trading access to people that the firm had authorized and pre-approved. As a result, overseas traders who were never approved and may not have been in compliance with U.S. laws ended up having market access.

Second Circuit Overturns Judge’s Decision to Block Citigroup’s $285M Settlement With the SEC

Published on: June 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Second Circuit appeals court said that District Judge Jed Rakoff abused his discretion when he rejected the $285 million mortgage settlement between the SEC and Citigroup (C). The regulator accused Citigroup of selling sections of Class V Funding III, a $1 billion mortgage-bond deal, without revealing that the bank was betting against $500 million of the assets.

Rakoff, a district court judge, said that he partially blocked the settlement because he didn’t agree with a Commission practice in which the party involved gets to resolve a case without denying or admitting to wrongdoing. Last year the SEC reversed its policy that automatically lets companies settle without making a wrongdoing admission. Now, the regulator is compelling admissions in cases that are especially egregious. Also, following Rakoff’s ruling, other judges followed his lead in a number of lawsuits.

This week, however, the appeals court said that the Commission should be granted wide deference when it is deciding whether or not a case should go to trial or settle. The three-judge panel said the deal between the SEC and Citigroup was in the interest of the public.

SEC Temporarily Shuts Down Investment Adviser Over Alleged $8.8M NY Securities Fraud

Published on: June 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission is temporarily shutting down investment adviser Scott Valente and his ELIV Group LLC. The regulator is charging both with defrauding about 80 investors of $8.8 million. The regulator says that Valente promised huge returns to customers, who are mostly from the Warwick and Albany areas.

However, rather than earning positive returns, he took close to $3 million of investor money and spent the funds on his own expenses, including mortgage payments and jewelry. Meantime, he charged these unsophisticated investors a 1% yearly fee for assets under management.

The SEC said that Valente kept the fraud going by issuing bogus investment statements every month that showed returns and assets under management that had been inflated. In fact, contends the regulator, in its few years of operation the investment firm lost $1.2 million and placed client money in illiquid and speculative privately held-companies. Also, while Valente said he had $17 million in assets under management, that amount was actually just $3.8 million.